US housing starts exceeded forecasts and rallied in November to their best pace in over three months, while permits rose to a seven-month high. However, single-family starts—a key segment for the housing market—fell to their lowest level since May 2017.

Housing Starts, Permits & Completions

After inching up in October, US housing starts jumped 3.2 percent to a seasonally adjusted annual rate (SAAR) of 1,256,000 units in November. Single-family starts accounted for 824,000 units, which is 4.6 percent below the revised October figure of 864,000, and starts for the volatile multi-family housing segment surged 22.4 percent to a 432,000 rate in November.

Privately-owned housing authorizations were up 5.0 percent to a rate of 1,328,000 units in November. Single-family authorizations increased to 848,000, which is 0.1 percent above the revised October figure. Privately-owned housing completions were up 0.4 percent to a SAAR of 1,099,000 units in November. Per the US Census Bureau Report, seasonally-adjusted total housing starts by region included:

Northeast: +37.8 percent (-34.1 percent last month)

South: +15.1 percent (+4.7 percent last month)

Midwest: -19.2 percent (+32.9percent last month)

West: -14.2 percent (-4.6 percent last month)

Seasonally-adjusted single-family housing starts by region included:

Northeast: -9.5 percent (+14.8 percent last month)

South: +6.8 percent (-4.0 percent last month)

Midwest: -3.2 percent (-1.6 percent last month)

West: -24.4 percent (-2.0 percent last month)

A recent survey showed confidence among single-family homebuilders dropped to a nearly 3-year low in December, with builders reporting that "consumer demand exists, but customers are hesitating to make a purchase because of rising home costs."

Mortgage Rates & Builder Outlook

The 30-year fixed mortgage rate is inched up to 4.87 in late November, which is up nearly 21 percent since the beginning of 2018. At the same time, builder sentiment continues to decline and recently dropped to 56 in December, which is the lowest level since May 2015 and a number that brought the yearly average for 2018 to 67, one point lower than 2017.

The National Association of Homebuilders (NAHB) blamed rising mortgage rates and prices for the drop in builder sentiment. “We are hearing from builders that consumer demand exists, but that customers are hesitating to make a purchase because of rising home costs,” the group said, adding that confidence was lowest in parts of the country where prices are highest.

The Slump Continues

Delphi Advisors provide additional analytical insights about the broader housing market in Forest2Market’s most recent issue of The Economic Outlook:

The housing market continued its perplexing slump in October, with permits, new sales and construction spending all retreating. While total starts and resales were positive on a month-over-month (MoM) basis, only resales exceeded consensus expectations. MarketWatch plaintively asked “is this as good as it gets?” while Zillow’s Aaron Terrazas reluctantly poured cold water on that positive resale number: “Storm disruptions in September likely pushed many closings back a month” he said, “and the fact remains that one strong month doesn’t erase the months-long losing streak that looks likely to continue as buyer headwinds—including rising mortgage interest rates and rising home prices—strengthen in coming months.”

“Almost all the trends in the U.S. housing market have been negative in recent months as housing market activity continues to adjust to higher mortgage rates,” Freddie Mac Chief Economist Sam Khater said. “If new home sales are to resume growth in 2019, builders may have to shift their focus to more modestly priced homes and smaller sized homes to help offset housing affordability concerns,” he added. “But with cost pressures pinching profitability, this will be a significant challenge.”

In addition to the drop in permits, wavering homebuilder confidence seems also to be portending trouble ahead. The National Association of Home Builders/Wells Fargo Housing Market Index in November fell to its weakest reading since 2016. “Notably, the sub-index for buyer traffic fell to 45, with readings below 50 indicating contraction,” LendingTree’s Chief Economist Tendayi Kapfidze said; “this suggests builders will be more cautious about adding inventory going forward,” especially in markets like Dallas, TX where builders are offering increasingly lucrative incentives to entice buyers.

“Rising rates, prices and taxes are contributing to the housing slowdown. Average mortgage rates rose to 4.94% [in mid-November] according to Freddie Mac, the highest in seven years. This has made housing about 15% less affordable than a year ago,” Kapfidze continued. “As there are [fewer] buyers at each price point, the appropriate market response is a slowdown in sales and an eventual easing in price momentum.”

Despite polling results showing pent-up demand to own, including among older Millennials, Realtor.com Chief Economist Danielle Hale said consumers are less optimistic about home buying right now, and builders are starting to notice. “Looking ahead, starts could slip further if builders believe the consumer pause will continue and they adjust production accordingly,” Hale said. “Rising home prices and rising mortgage rates have created high hurdles for homebuyers while cost increases make it difficult for builders to deliver homes at the price points that are most in-demand. The result has been a stalemate between buyers and sellers, with fewer transactions than... a year ago.”

The National Association for Business Economics (NABE) downgraded its estimates for home construction in 2019. After 1.26 million starts in 2018, NABE projects builders will start construction on 1.3 million units, a reduction of 50,000 units from NABE’s October survey.